Land tax, council rates, land acquisition powers, value-capture tax & Auckland Council funding: Murray Sherwin chats to Alex Tarrant about improving NZ's urban planning framework

By Alex Tarrant

It’s not often you get to talk about land tax, compulsory acquisition powers, water & road user charges, value-capture tax, encouraging land bankers to develop, NIMBYs and Auckland Council debt in one sitting.

Unless, of course, you’re chatting with Productivity Commission chairman Murray Sherwin about how to overhaul New Zealand’s urban development framework.

I sat down with Murray in the Commission’s Wellington offices to ask about a few subjects dear to Interest.co.nz readers’ hearts that were raised in its 516-page report on our urban development framework.

Land tax (or council rates if you want a calmer reaction)

One of the recommendations the Commission made is to change how rates are levied by local authorities. Rates are a land tax in disguise – it’s just that New Zealanders tend to have an aversion to anything with ‘tax’ in it, so we called them rates.

The recommendation is that we start levying rates on the undeveloped portion of land. Sherwin explained that about 20 years ago, legislation was introduced that recommended levying rates capital value – ie land plus improvements (buildings, basically).

“Actually that doesn’t do what it was intended to do,” Sherwin said. “And in particular what it does is, essentially lets people who are sitting on vacant land off the hook – they get a lower rating base because there’s no improvement on their land.”

These are the people who may be land banking – just sitting there with undeveloped land waiting for Godot to turn up.

Changing how we levy rates to the unimproved part of the land would remove the incentive for land bankers to just sit there, and encourage them to get on with doing something with that land, Sherwin said.

In broader economic terms a tax on land is one of the most efficient ways to raise revenue. “You can’t avoid it, you can’t shift [it]…so it’s an efficient tax in its own right.”

Now, don’t get excited that we’ll see a change any time soon. Sherwin pointed out that Auckland Council was obliged under the Super City Act to move to capital value rating from its previous land-base.

“So I don’t think they’re going to turn around quickly. But as a basic principal we think that [unimproved] land is a better basis for rating.”

One question on individual land owners’ minds is, how would this affect me and the land my house is on? Well, things should work out pretty much the same, Sherwin said. Work done by the Commission suggested the recommended change might be even more equitable than the current capital value rating system.

“People who own the more expensive land, in any event, tend to be the wealthier people. So it all works through,” he said.

Targeted rates

One proposition the Commission kept running up against was that “growth doesn’t pay for itself,” Sherwin said.

In Auckland, for example, a rapidly growing population requires infrastructure, three waters, new roads, you name it. Yet the Council has found it’s not getting the uplift in revenue through its rating base sufficient to cover that.

The Commission explored how to get greater responsiveness of city revenue to population growth. How do you make the investment in infrastructure more bankable?

Enter the conversation about user charges on water and sewers. Roads, too. Make people pay for resources and they’ll be more efficient in their use of those resources.

“We’ve seen in places that have introduced, for instance, water charging, that demand has fallen by as much as 30%,” Sherwin said.

“That means you’re not having to build more expensive infrastructure to cope with growth because the existing stuff will go further.”

“You can give the water away free if you like, but charge a delivery fee.” Do the same on roading – user charges or congestion charges. Put volumetric charges on something and watch usage become more efficient.

Value capture tax

One potential revenue source for councils is the imposition of value uplift taxes. Take an example of any unserviced block of land. Add three-waters and roads, and the value of that land jumps because it’s now usable for dense development.

“So why shouldn’t the council that’s funding the infrastructure claim a slice of that to fund the cost of that infrastructure?” Sherwin asked.

Another example of where value capture tax could work in Auckland is the inevitable rise in values of properties close to new city rail link stations. Could Council target these properties? “Absolutely.”

Melbourne has done this quite nicely with a graduated tax on properties that are near one of their inner city rail loops, Sherwin said.

“Property values went up, the marketability and the rents in those properties went up, so the council gets a part of that to help fund the infrastructure.”

Sell us your land (yes, you do have to)

Government compulsory acquisition powers under the Public Works Act have been in the news in the past few years, with a swathe of centrist economists suggesting we shouldn’t shy away from using them to make sure there’s enough land to develop affordable housing on.

Under the Public Works Act there are provisions where the state can claim, with proper pricing and compensation, private property to enable public good activities to take place.

The Commission has recommended we go a step further – local development authorities should also have that power. Sherwin said he envisages the powers would be used mainly when trying to redevelop existing inner city areas where a given landowner might be holding out and holding back a large-scale redevelopment.

Having said that: “We’re quite cautious about this because when you start messing around with private property rights you need to be cautious,” Sherwin said.

“I’m not sure that it’ll be used a lot,” he added. “I think it’s going to be used mostly, if it is, in inner city redevelopment areas.”

Govt covering Auckland borrowing?

Of surprise to some Productivity Commission spotters, was the recommendation that central government could use its creditworthiness to help take debt off the Auckland Council’s balance sheet.

The Commission spoke “quite a lot” with the Auckland Council about its funding constraints, Sherwin said. They see themselves being quite hard up against their limits. How do you get some of the costs off balance sheet or give the council a greater ability to take on more debt?

“Our sense is, for rapidly growing cities, particularly if they can get a bit of responsiveness in terms of revenue flow to growth, then probably the debt limits the credit rating agencies and others are setting are a bit tight,” Sherwin said.

Beyond that it’s really a question of looking to other balance sheets that you can put some of that debt on (or the risk of that debt on) to spread the load a bit more to facilitate infrastructure development.

The recommendation, therefore, shouldn’t come as much of a shock. Clearly the capacity of cities to invest in infrastructure has been a problem and remains a major problem.

Is it politically feasible? About those NIMBYs…

The big question is, what is politically feasible? We’ve already had the major parties trading blows on who’s pro and against development and whose policies best mirror the Commission’s recommendations.

We don’t need to see the complete 64-part package, Sherwin said.

“What we’re saying is that it really is time to start again with the RMA, and the other pieces of legislation that feed into urban planning.”

The RMA has been back to Parliament 18 times since it was introduced 25 years ago. And for all its revolutionary concepts back then, it’s not an urban planning document.

“It’s lost its way, it’s lost its shape.”

Whatever replaces the RMA requires consideration of both the urban and natural environments.

It needs to contain a series of principals and objectives spelling out the framework against which councils should plan, starting with 30 to 50-year regional spatial plan umbrellas under which development is expected to take place.

For example, this would include securing, at an early stage, the corridors for roads and other infrastructure so you’re not trying to buy them late in the piece, Sherwin said.

Borrowing from the experiences of Auckland and Christchurch, the framework could incorporate systems such as having independent hearing panels reviewing plans to take the politics out of things, and checking them against the principals and objectives spelt out in the legislation.

“One of the reasons for doing that is that we’ve seen quite a lot of regulatory overreach…out of the planners and the councils, where they’ve started going beyond their mandates,” Sherwin said.

Due to pressure from NIMBYs? “Yeah all that stuff, and some stuff which really goes well beyond what you’d expect to be able to achieve under land-use planning, which is effectively what [the current system] is.”

The message: We need to push back against some of that overreach; Short-circuit the review processes. It’s still important for Councils to engage with their communities, but the specificity in some of the existing legislation just doesn’t line up; Councils find themselves consulting on particular propositions two or three times under different Acts, Sherwin said.

Not a very good framework. Time to start again.

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